FISCAL POLICY | Custom PHD Thesis

1. An article in the Wall Street Journal criticized the concept that an increase in government spending can generate an increase in GDP equal to a multiple of the amount spent:

ìIn what passes for debate in Washington, the prevailing notion seems to be ëputting money in peopleís pockets.í This might be called single-entry Keynesianism, since the money the government puts in pockets arrives by immaculate conception. Something like this was indeed taught in Econ 101 in the 1950s; the government ëinjectedí money, remember, to be ëmultipliedí a number of times depending on ëthe marginal propensity to consume.í Consumption good, savings bad.

ìBy the 1960s, the monetarist school of economics had revived, and asked, where does the government get this money it ëinjects.í If itís created by the Fed, youíre talking about monetary policy, not fiscal policy. If it isnít, you have to siphon whatever you ëinjectí out of the private sector by taxing or borrowing. How does it stimulate to take with one hand and give with the other?î (Bartley, Robert L. ìThinking Things Over: Does Spending Stimulate? Do Deficits?î Wall Street Journal, February 4, 2002 (Eastern edition): pg. A.17)

The criticism above implies that fiscal policy alone cannot change aggregate demand because any increase in government purchases must be financed either by raising taxes or borrowing.

a. Suppose taxes paid by households are raised by $100 million in order to finance an additional $100 million of government expenditure. Explain why there would be a net increase in aggregate demand as a result.

b. Suppose that to finance $100 million of additional government expenditure, the government runs a $100 million budget deficit instead of increasing taxes. How will this policy affect aggregate expenditure and aggregate demand?

2. Three years after congress passed President Bushís tax cuts, a Wall Street Journaleditorial explains the economic impact of the 2003 tax cuts: (ìThe Tax Cut Record,î Wall Street Journal.: May 12, 2006. pg. A. 18)

ìThe 2003 tax cuts on dividends and capital gains were designed precisely to help business supplant consumer spending as the engine of recovery. By boosting the after-tax return on capital and increasing incentives to invest, the tax cuts provided an immediate lift to stock-market valuations and improved business balance sheets.î

Almost at the very time the tax cuts looked like they would pass, business investment began to pick up, and it has kept rising since. This has been a classic investment-led expansion with record amounts of business spending on new plant, equipment, machinery, software, and research and development.î

The above quote accurately describes which one of the impacts of fiscal policy on investment and saving discussed in your textbook?

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Online Legal and Business Studies

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Course: Macroeconomics: ECO1021511

Assignment: Assignment 5

Fiscal Policy

1. An article in the Wall Street Journal criticized the concept that an increase in government spending can generate an

increase in GDP equal to a multiple of the amount spent:

ìIn what passes for debate in Washington, the prevailing notion seems to be ëputting money in peopleís pockets.í This might be called singleentry

Keynesianism, since the money the government puts in pockets arrives by immaculate conception. Something like this was indeed taught in Econ 101 in the

1950s; the government ëinjectedí money, remember, to be ëmultipliedí a number of times depending on ëthe marginal propensity to consume.í Consumption good,

savings bad.

ìBy the 1960s, the monetarist school of economics had revived, and asked, where does the government get this money it ëinjects.í If itís created by the Fed,

youíre talking about monetary policy, not fiscal policy. If it isnít, you have to siphon whatever you ëinjectí out of the private sector by taxing or borrowing. How

does it stimulate to take with one hand and give with the other?î (Bartley, Robert L. ìThinking Things Over: Does Spending Stimulate? Do Deficits?î Wall Street

Journal, February 4, 2002 (Eastern edition): pg. A.17)

The criticism above implies that fiscal policy alone cannot change aggregate demand because any increase in

government purchases must be financed either by raising taxes or borrowing.

a. Suppose taxes paid by households are raised by $100 million in order to finance an additional $100 million of

government expenditure. Explain why there would be a net increase in aggregate demand as a result.

b. Suppose that to finance $100 million of additional government expenditure, the government runs a $100 million

budget deficit instead of increasing taxes. How will this policy affect aggregate expenditure and aggregate demand?

2. Three years after congress passed President Bushís tax cuts, a Wall Street Journaleditorial explains the economic

impact of the 2003 tax cuts: (ìThe Tax Cut Record,î Wall Street Journal.: May 12, 2006. pg. A. 18)

ìThe 2003 tax cuts on dividends and capital gains were designed precisely to help business supplant consumer spending as the engine of recovery. By

boosting the aftertax

return on capital and increasing incentives to invest, the tax cuts provided an immediate lift to stockmarket

valuations and improved

business balance sheets.î

Almost at the very time the tax cuts looked like they would pass, business investment began to pick up, and it has kept rising since. This has been a classic

investmentled

expansion with record amounts of business spending on new plant, equipment, machinery, software, and research and development.î

The above quote accurately describes which one of the impacts of fiscal policy on investment and saving discussed in

your textbook?

2/17/2016 National Paralegal College View

Assignments National

Paralegal College

http://nationalparalegal.edu/Students/ViewAssignment.aspx?intAssignmentID=2193 2/3

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2/17/2016 National Paralegal College View

Assignments National

Paralegal College

http://nationalparalegal.edu/Students/ViewAssignment.aspx?intAssignmentID=2193 3/3

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